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CREDIT MARKETS; BONDS DIVE AS JAPANESE HOLD BACK

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Tension mounted in the credit markets yesterday when prices dropped sharply because of weak demand from domestic and Japanese investors for $9.75 billion of new 10-year Treasury notes.

Amid the increased concern, securities dealers braced themselves for today's $9.25 billion auction of 30-year bonds, the third part of this week's $29 billion refinancing by the Treasury.

Much of the drop in prices came after the 1 P.M. auction of new 8 1/2 percent 10-year notes, when Government securities dealers recognized that investor demand was not as large as they had hoped.

''Investor demand was light, and as long as dealers are not distributing the new issues, the risk is for lower prices,'' said E. Craig Coates, a managing director at Salomon Brothers. Bond Prices Down 12 Percent

Investors are dismayed at forecasts of higher interest rates and are reluctant to buy until there are more signs of stable prices. Securities dealers, many of them already nursing large losses incurred in the last six weeks, are helping to create volatility by limiting the amount of securities they will hold in inventory and cutting prices quickly to protect themselves against further losses.

''Few institutions, Japanese or American, like to commit funds in an unstable environment like the one we have seen in recent weeks,'' said William H. Gross, a managing director at the Pacific Investment Management Company. ''At some point, the fundamental values that I think exist at current prices will attract some bottom-fishing. But for the time being, people are willing to let the securities dealers take the risk on the new Government issues.''

Concern about Japanese participation in the Treasury auctions spilled over into foreign exchange trading, and the dollar fell against most foreign currencies. [ Page D18. ] Treasury Yields Rise To attract more buyers, securities dealers cut prices aggressively after yesterday's auction, so that the new 10-year notes were traded late in the day at 8.54 percent, compared with an average auction yield of 8.52 percent and 8.39 percent a day earlier. The 30-year bonds to be sold today were offered at 8.72 percent, up from 8.63 percent earlier in the day. Among outstanding issues, the 7 1/2 percent Treasury bonds due in 2016 declined by nearly 1 1/8 points to an offered price of 86 29/32, to yield 8.74 percent. The 7 1/2 percent issue was at 99 14/32, to yield 7.55 percent, as recently as March 26, but it traded as low as 85 30/32, to yield more than 8.8 percent, last week.

''Clearly, Japanese investors were not as interested as they were in some previous 10-year auctions,'' said John J. Niehenke, senior vice president at the Nomura Securities Company International, the American arm of the largest Japanese securities firm. He estimated that Japanese firms bought 10 to 15 percent of the 10-year issue, a reading that other market participants said seemed to be close to the mark.

''But not all the purchases represents retail interest,'' Mr. Niehenke said, noting that Japanese firms, like their American counterparts, buy notes and bonds in anticipation of future orders. ''The real test will come tomorrow,'' he said, referring to the 30-year Treasury bond auction where, in the past, Japanese firms have absorbed nearly half of the issues sold.

The Nomura official noted that many potential Japanese buyers for yesterday's auction had not returned from the ''golden week'' holiday, or had just returned to their offices and were still catching up on recent developments. Several analysts said Japanese demand might improve as prices fall and investors return from the holiday. Japanese Worried

The paucity of Japanese demand has convinced analysts that Japanese investors are more concerned about the potential for loss from further weakness in the dollar than the benefits of the high yields available on Treasury issues. The dollar traded yesterday at about 139 yen, compared with 152 yen at the previous 10-year note auction in February.

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According to a Reuter's dispatch, Ooara Toshiyuki, chief of the foreign security division at the Sumitomo Life Insurance Company, said that his concern had no plans for new investments in Treasury bonds, and was concerned that the yen may appreciate further to a rate of 100 to the dollar.

At the Dai-ichi Mutual Life Insurance Company, Keiichiro Mori, chief of international investments, told Reuters that he wanted to see American trade figures for March before committing more money to the American market.

Besides the March trade figures, which are to be published on May 14, many analysts said they were waiting for tomorrow's report on April employment. Evidence that the American trade deficit is shrinking could change the widespread assumption that the dollar will decline in coming months. The employment report will be closely watched because it could provide clues about the economy's strength and its ability to weather any moves by the Federal Reserve to raise short-term interest rates. Wide Yield Spread

While many analysts agree that American investors are just as cautious as their Japanese counterparts, they are bewildered that the Japanese are not more attracted by the wide yield differential between Treasury and Japanese Government bonds.

At 2.83 percent, the actively traded bellwether 10-year Japanese Government issue yields about 5.7 percentage points less than the new 10-year Treasury notes. As recently as April 22, the differential between the two issues was 4.6 percentage points, up from 2.3 points at the end of February and 1.75 points last November.

The current interest differential is wide enough, analysts say, to compensate long-term investors for a substantial decline in the dollar to below 90 yen, though it offers little comfort to traders and speculators who might not hold the Treasury issue long enough to realize much benefit from its higher interest rate.

Besides their reluctance to buy until the Japanese have returned to the market, some American investors said they were discouraged by forecasts of higher rates.

In the Treasury bill market, rates for three- and six-month issues fell sharply by about 3/8 percentage point to 5.42 percent and 5.71 percent, respectively. Besides the Treasury's announcement that it will auction only $12.8 billion of new bills next month, $2 billion less than the amount maturing, traders speculated that Congress will not raise the Federal debt ceiling by the middle of this month, causing the cancellation of some bill auctions.

A version of this article appears in print on May 7, 1987, on Page D00001 of the National edition with the headline: CREDIT MARKETS; BONDS DIVE AS JAPANESE HOLD BACK. Order Reprints|Today's Paper|Subscribe